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More than 52 percent of businesses today are home-based. Every day, people are striking out and achieving economic and creative independence by turning their skills into dollars. Garages, basements and attics are being transformed into the corporate headquarters of the newest entrepreneurs – home-based businesspeople.
And, with technological advances in smartphones, tablets, and iPads as well as a rising demand for “service-oriented” businesses, the opportunities seem to be endless.
Is a Home-Based Business Right for You?
Choosing a home business is like choosing a spouse or partner: Think carefully before starting the business. Instead of plunging right in, take time to learn as much about the market for any product or service as you can. Before you invest any time, effort, and money take a few moments to answer the following questions:
- Can you describe in detail the business you plan on establishing?
- What will be your product or service?
- Is there a demand for your product or service?
- Can you identify the target market for your product or service?
- Do you have the talent and expertise needed to compete successfully?
Before you dive head first into a home-based business, it’s essential that you know why you are doing it and how you will do it. To succeed, your business must be based on something greater than a desire to be your own boss: an honest assessment of your own personality, and understanding of what’s involved, and a lot of hard work. You have to be willing to plan ahead, and then make improvements and adjustments along the road. While there are no “best” or “right” reasons for starting a home-based business, it is vital to have a very clear idea of what you are getting into and why. Ask yourself these questions:
- Are you a self-starter?
- Can you stick to business if you’re working at home?
- Do you have the necessary self-discipline to maintain schedules?
- Can you deal with the isolation of working from home?
Working under the same roof that your family lives under may not prove to be as easy as it seems. It is important that you work in a professional environment; if at all possible, you should set up a separate office in your home. You must consider whether your home has the space for a business, and whether you can successfully run the business from your home.
Compliance with Laws and Regulations
A home-based business is subject to many of the same laws and regulations affecting other businesses and you will be responsible for complying with them. There are some general areas to watch out for, but be sure to consult an attorney and your state department of labor to find out which laws and regulations will affect your business.
Be aware of your city’s zoning regulations. If your business operates in violation of them, you could be fined or closed down.
Restrictions on Certain Goods
Certain products may not be produced in the home. Most states outlaw home production of fireworks, drugs, poisons, sanitary or medical products, and toys. Some states also prohibit home-based businesses from making food, drink, or clothing.
Registration and Accounting Requirements
You may need the following:
- Work certificate or a license from the state (your business’s name may also need to be registered with the state)
- Sales tax number
- Separate business telephone
- Separate business bank account
If your business has employees, you are responsible for withholding income, social security, and Medicare taxes, as well as complying with minimum wage and employee health and safety laws.
Money fuels all businesses. With a little planning, you’ll find that you can avoid most financial difficulties. When drawing up a financial plan, don’t worry about using estimates. The process of thinking through these questions helps develop your business skills and leads to solid financial planning.
Estimating Start-Up Costs
To estimate your start-up costs, include all initial expenses such as fees, licenses, permits, telephone deposit, tools, office equipment and promotional expenses.
Business experts say you should not expect a profit for the first eight to 10 months, so be sure to give yourself enough of a cushion if you need it.
Projecting Operating Expenses
Include salaries, utilities, office supplies, loan payments, taxes, legal services and insurance premiums, and don’t forget to include your normal living expenses. Your business must not only meet its own needs, but make sure it meets yours as well.
It is essential that you know how to estimate your sales on a daily and monthly basis. From the sales estimates, you can develop projected income statements, break-even points and cash-flow statements. Use your marketing research to estimate initial sales volume.
Determining Cash Flow
Working capital–not profits–pays your bills. Even though your assets may look great on the balance sheet, if your cash is tied up in receivables or equipment, your business is technically insolvent. In other words, you’re broke.
Make a list of all anticipated expenses and projected income for each week and month. If you see a cash-flow crisis developing, cut back on everything but the necessities.
If you think a home-based business is in your future, then don’t hesitate to give us a call. We’ll set up your business and make sure you have the proper documentation system in place to satisfy the IRS.Read More
If you’re one of the more than 3.4 million taxpayers claimed deductions for business use of a home (commonly referred to as the home office deduction), you might be interested in the new simplified option available for taxpayers starting with the 2013 return most taxpayers file early in 2014.
The new optional deduction, recently announced by the IRS, is capped at $1,500 per year based on $5 a square foot for up to 300 square feet. It is expected to reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually.
Currently, taxpayers claiming the home office deduction are generally required to fill out a 43-line form (Form 8829) often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions. Taxpayers claiming the optional deduction will complete a significantly simplified form.
Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method. Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible.
Current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option.
If you need more details about the new simplified home office deduction for tax year 2013, don’t hesitate to give us a call. We’re here to help.Read More
Although Intuit did a great job of giving QuickBooks’ home page a fresher, more “open” look in its 2013 versions, maybe some of your screens have become unnecessarily cluttered. Perhaps your QuickBooks company file needs some attention as well. By taking a few minutes to do some “spring cleaning” you’ll have a tidier workspace, and you’ll save time and frustration. The following suggestions will help you to do just that.
Make a Clean Start
One simple way to take care of cluttered screens is to do the following:
- Minimize icons. That pretty graphical process map on the home page is great for quick access to frequently-used actions. Some of them must remain there if they’re related to activities you do (i.e., Invoices has to stay if you use Estimates), but you can remove some of the ones you don’t use. Go to Preferences | Desktop View | Company Preferences. You’ll see this:
Figure 1: You can turn off some of the feature icons on your home page.
Some of the options have been grayed out because they support other processes. To remove an active feature icon like Inventory, click on it. In the window that opens, uncheck the box next to Inventory and purchase orders are active (you can also modify options here).
Figure 2: Clicking the checkbox next to Inventory and purchase orders are active grays out the other options and removed related feature icons from the home page.
To reduce the number of feature icons even more, go to the Finance Charge, Jobs & Estimates, Payroll & Employees, Sales & Customers, Sales Tax and Time & Expenses. QuickBooks removes the related icons and reroutes the process map on the home page.
More Time-Saving Tweaks
- Don’t allow multiple windows to open in your work area. Tired of seeing all of those overlapping open windows on your desktop? Open the View menu and select One Window. All of your open windows remain active in the background. To return to one of them, open the Window menu and select the one you want to move to the front (Window | Close All returns you to a blank work area).
Figure 3: Your Icon bar can be your fastest route to often needed screens–if you modify it to only contain the functions you use, in order of importance. You can also change the labels to make them more meaningful to you.
- Trim down your icon bar. Seems like a minimal change, but it’s one of those things that can add unnecessary moments of frustration throughout the day (“Where’s the Calendar!”). Click View | Customize Icon Bar.
- Customize columns in Lists. You probably work in QuickBooks’ Lists often, but are you spending too much time tracking down the right information? Customize their columns so your registers contain only what you usually need (and add additional ones if it’s helpful). Open a list, right-click anywhere within it and select Customize Columns to modify the display (re-size column widths by placing your cursor on the vertical set of dots between labels and dragging).
Figure 4: When you customize your columns in Lists, you’ll find what you’re looking for faster.
- Hide inactive items. Highlight an item, right-click and select Make Item Inactive. Open the Item menu in the lower left and click Hide Inactive Items (this action won’t delete them).
These may all seem like cosmetic changes, but you will save time and frustration over the long run.
The most critical spring cleaning task is company file analysis and maintenance. We can handle this for you. QuickBooks can slow down and start generating error messages when the data file becomes unwieldy and sloppy. Preventing file corruption before it crashes your system is a lot faster and less expensive than a reconstruction project.Read More
Question: How do I know if I have to file quarterly individual estimated tax payments?
Answer: If you owed additional tax for the prior tax year, you may have to make estimated tax payments for the current tax year.
If you are filing as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return.
If you are filing as a corporation you generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return.
If you had a tax liability for the prior year, you may have to pay estimated tax for the current year; however, if you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings.
There are special rules for farmers, fishermen, certain household employers, and certain higher taxpayers.
Contact us if you are unsure whether you need to make an estimated tax payment. The first estimated payment for 2012 is due April 15, 2013.Read More
If you haven’t contributed funds to an Individual Retirement Arrangement for tax year 2012, or if you’ve put in less than the maximum allowed, you still have time to do so. You can contribute to either a traditional or Roth IRA until the April 15 due date for filing your tax return for 2012, not including extensions.
Be sure to tell the IRA trustee that the contribution is for 2012. Otherwise, the trustee may report the contribution as being for 2013 when they get your funds.
Generally, you can contribute up to $5,000 of your earnings for 2012 or up to $6,000 if you are age 50 or older in 2012. You can fund a traditional IRA, a Roth IRA (if you qualify), or both, but your total contributions cannot be more than these amounts.
Note: IRA contribution limits increase in 2013 to $5,500 ($6,500 if age 50 or older).
Traditional IRA: You may be able to take a tax deduction for the contributions to a traditional IRA, depending on your income and whether you or your spouse, if filing jointly, are covered by an employer’s pension plan.
Roth IRA: You cannot deduct Roth IRA contributions, but the earnings on a Roth IRA may be tax-free if you meet the conditions for a qualified distribution.
Each year, the IRS announces the cost of living adjustments and limitation for retirement savings plans.
Saving for retirement should be part of everyone’s financial plan and it’s important to review your retirement goals every year in order to maximize savings. If you need help with your retirement plans, give us a call. We’re happy to help.Read More
Confused about which credits and deductions you can claim on your 2012 tax return? You’re not alone. Even in an ordinary tax year, it’s hard to remember which tax breaks you can take, but the fiscal cliff fiasco this year made it even more difficult to keep everything straight. With that in mind here are six tax breaks for 2012 that you won’t want to overlook.
1. State Sales and Income Taxes
Thanks to the fiscal cliff deal, the sales tax deduction, which expired at the end of 2011, was reinstated retroactive to 2012 (it expires at the end of 2013). As such, IRS allows for a deduction of either state income tax paid or state sales tax paid, whichever is greater.
If you bought a big ticket item like a car or boat in 2012, it might be more advantageous to deduct the sales tax, but don’t forget to figure any state income taxes withheld from your paycheck just in case. If you’re self-employed you can include the state income paid from your estimated payments. In addition, if you owed taxes when filing your 2011 tax return in 2012, you can include the amount when you itemize your state taxes this year on your 2012 return.
2. Child and Dependent Care Tax Credit
Most parents realize that there is a tax credit for daycare when their child is young, but they might not realize that once a child starts school, the same credit can be used for before and after school care, as well as day camps during school vacations. This child and dependent care tax credit can also be taken by anyone who pays a home health aide to care for a spouse or other dependent. The credit is worth a maximum of $1,050 or 35% of $3,000 of eligible expenses per dependent.
3. Job Search Expenses
Job search expenses are 100% deductible, whether you are gainfully employed or not currently working–as long as you are looking for a position in your current profession. Expenses include fees paid to join professional organizations, as well as employment placement agencies that you used during your job search. Travel to interviews is also deductible (as long as it was not paid by your prospective employer) as is paper, envelopes, and costs associated with resumes or portfolios. The catch is that you can only deduct expenses greater than 2% of your adjusted gross income (AGI).
4. Student Loan Interest Paid by Parents
Typically, a taxpayer is only able to deduct interest on mortgages and student loans if he or she is liable for the debt; however, if a parent pays back their child’s student loans the money is treated by the IRS as if the child paid it. As long as the child is not claimed as a dependent, he or she can deduct up to $2,500 in student loan interest paid by the parent. The deduction can be claimed even if the child does not itemize.
5. Medical Expenses
Most people know that medical expenses are deductible as long as they are more than 7.5% of AGI for tax year 2012 (10% in 2013). What they often don’t realize is what medical expenses can be deducted such as medical miles (23 cents per mile) driven to and from appointments and travel (airline fares or hotel rooms) for out of town medical treatment.
Other deductible medical expenses that taxpayers might not be aware of include: health insurance premiums, prescription drugs, co-pays, and dental premiums and treatment. Long-term care insurance (deductible dollar amounts vary depending on age) is also deductible, as are prescription glasses and contacts, counseling, therapy, hearing aids and batteries, dentures, oxygen, walkers, and wheelchairs.
6. Bad Debt
If you’ve loaned money to a friend, but were never repaid, you may qualify for a non-business bad debt tax deduction of up to $3,000 per year. To qualify however, the debt must be totally worthless, in that there is no reasonable expectation of payment.
Non-business bad debt is deducted as a short-term capital loss, subject to the capital loss limitations. You may take the deduction only in the year the debt becomes worthless. You do not have to wait until a debt is due to determine whether it is worthless. Any amount you are not able to deduct can be carried forward to reduce future tax liability.
Are you getting all of the tax credits and deductions you are entitled to? Maybe you are…but maybe you’re not. Why take a chance? Make an appointment with us today and we’ll make sure you get the tax breaks you deserve.Read More
One of the biggest hurdles you’ll face in running your own business is staying on top of your numerous obligations to federal, state, and local tax agencies. Tax codes seem to be in a constant state of flux making the Internal Revenue Code barely understandable to most people.
The old legal saying that “ignorance of the law is no excuse” is perhaps most often applied in tax settings and it is safe to assume that a tax auditor presenting an assessment of additional taxes, penalties, and interest will not look kindly on an “I didn’t know I was required to do that” claim. On the flip side, it is surprising how many small businesses actually overpay their taxes, neglecting to take deductions they’re legally entitled to that can help them lower their tax bill.
Preparing your taxes and strategizing as to how to keep more of your hard-earned dollars in your pocket becomes increasingly difficult with each passing year. Your best course of action to save time, frustration, money, and an auditor knocking on your door, is to have a professional accountant handle your taxes.
Tax professionals have years of experience with tax preparation, religiously attend tax seminars, read scores of journals, magazines, and monthly tax tips, among other things, to correctly interpret the changing tax code.
When it comes to tax planning for small businesses, the complexity of tax law generates a lot of folklore and misinformation that also leads to costly mistakes. With that in mind, here is a look at some of the more common small business tax misperceptions.
1. All Start-Up Costs Are Immediately Deductible
Business start-up costs refer to expenses incurred before you actually begin operating your business. Business start-up costs include both start up and organizational costs and vary depending on the type of business. Examples of these types of costs include advertising, travel, surveys, and training. These start up and organizational costs are generally called capital expenditures.
Costs for a particular asset (such as machinery or office equipment) are recovered through depreciation or Section 179 expensing. When you start a business, you can elect to deduct or amortize certain business start-up costs.
For tax years beginning in 2010, you can elect to deduct up to $10,000 of business start-up costs paid or incurred after 2009. The $10,000 deduction is reduced (but not below zero) by the amount such start-up costs exceed $60,000. Any remaining costs must be amortized.
2. Overpaying The IRS Makes You “Audit Proof”
The IRS doesn’t care if you pay the right amount of taxes or overpay your taxes. They do care if you pay less than you owe and you can’t substantiate your deductions. Even if you overpay in one area, the IRS will still hit you with interest and penalties if you underpay in another. It is never a good idea to knowingly or unknowingly overpay the IRS. The best way to “Audit Proof” yourself is to properly document your expenses and make sure you are getting good advice from your tax accountant.
3. Being incorporated enables you to take more deductions.
Self-employed individuals (sole proprietors and S Corps) qualify for many of the same deductions that incorporated businesses do, and for many small businesses, being incorporated is an unnecessary expense and burden. Start-ups can spend thousands of dollars in legal and accounting fees to set up a corporation, only to discover soon thereafter that they need to change their name or move the company in a different direction. In addition, plenty of small business owners who incorporate don’t make money for the first few years and find themselves saddled with minimum corporate tax payments and no income.
4. The home office deduction is a red flag for an audit.
While it used to be a red flag, this is no longer true–as long as you keep excellent records that satisfy IRS requirements. Because of the proliferation of home offices, tax officials cannot possibly audit all tax returns containing the home office deduction. In other words, there is no need to fear an audit just because you take the home office deduction. A high deduction-to-income ratio however, may raise a red flag and lead to an audit.
5. If you don’t take the home office deduction, business expenses are not deductible.
You are still eligible to take deductions for business supplies, business-related phone bills, travel expenses, printing, wages paid to employees or contract workers, depreciation of equipment used for your business, and other expenses related to running a home-based business, whether or not you take the home office deduction.
6. Requesting an extension on your taxes is an extension to pay taxes.
Extensions enable you to extend your filing date only. Penalties and interest begin accruing from the date your taxes are due.
7. Part-time business owners cannot set up self-employed pensions.
If you start up a company while you have a salaried position complete with a 401K plan, you can still set up a SEP-IRA for your business and take the deduction.
A tax headache is only one mistake away, be it a missed payment or filing deadline, an improperly claimed deduction, or incomplete records and understanding how the tax system works is beneficial to any business owner, whether you run a small to medium sized business or are a sole proprietor.
And, even if you delegate the tax preparation to someone else, you are still liable for the accuracy of your tax returns. If you have any questions, don’t hesitate to give us a call today. We’re here to assist you.Read More